Bargaining with a Residual Claimant: An Experimental Study

37 Pages Posted: 1 Oct 2014 Last revised: 8 Feb 2019

See all articles by Matthew Embrey

Matthew Embrey

University of Sussex, Department of Economics

Kyle B. Hyndman

University of Texas at Dallas

Arno Riedl

Maastricht University; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 2 versions of this paper

Date Written: February 4, 2019

Abstract

Most negotiations involve risks that are only resolved ex-post and often these risks are not incurred equally by the parties involved. We experimentally investigate bargaining situations where a residual claimant is exposed to ex-post risk, whereas a fixed-payoff player is not. We find that residual claimants extract a risk premium, which increases in risk exposure and that this premium is sometimes high enough to make it beneficial to bargain over a risky rather than a risk-less pie. In contrast to predictions of a benchmark model, it is the comparatively less risk averse residual claimants who benefit the most and this is driven by fixed-payoff player's adoption of weak bargaining strategies when the pie is risky. It is also the less risk averse who, when given the choice, choose to bargain over a riskier distribution. We also show that as risk increases, conflict about what constitutes a fair compensation for risk exposure is enhanced, which increases bargaining frictions.

Keywords: Bargaining, Ex-post Risk, Reference Points

JEL Classification: C71, C92, D81

Suggested Citation

Embrey, Matthew and Hyndman, Kyle B. and Riedl, Arno M., Bargaining with a Residual Claimant: An Experimental Study (February 4, 2019). Available at SSRN: https://ssrn.com/abstract=2502891 or http://dx.doi.org/10.2139/ssrn.2502891

Matthew Embrey

University of Sussex, Department of Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

HOME PAGE: http://www.sussex.ac.uk/economics/people/peoplelists/person/363998

Kyle B. Hyndman (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Arno M. Riedl

Maastricht University ( email )

Department of Economics (AE1)
P.O. Box 616
Maastricht, 6200 MD
Netherlands

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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